If you’re looking for an easy way to make a little extra money, renting out a spare room in your home might be the way to do it. Not only will you get to enjoy the regular stream of income but, thanks to the Rent A Room Scheme, you’ll also benefit from up to £7,500 of your profits tax-free.
In April 2016, the government raised the tax-free allowance for income from renting out a room to £7,500 and £3,750 where two people own the property jointly; making it a great way for homeowners to supplement their income.
The Rent A Room Scheme – Am I eligible?
This scheme is available both to owner occupiers and tenants where their contract allows them to take on a lodger. You will be eligible to use the Rent A Room Scheme if:
- You let out a furnished room to a lodger in your only or main home.
- Your letting activity amount to trade, such as running a bed and breakfast or providing services to your lodger such as cleaning and cooking.
If you charge your lodger for additional services such as providing meals or laundry services, you’ll need to add any money you receive for these to the rent to work out your total income. Should this come to more than £7,500 for the tax year and your overall income exceed your individual personal allowance, you will need to pay some tax.
However, not everyone is eligible for this scheme. If the room is not furnished or is not part of your main home at the time of letting, you will not be able to benefit from the allowance. You also may not let out the room in your UK home whilst you live abroad as part of this scheme.
Rooms and buildings that are used as an office or for any kind of business are not included in the scheme, unless your lodger works in your home only during evenings or weekends or is a student provided with study facilities.
The Rent A Room Scheme – What if I currently receive benefits?
This government-funded scheme can provide a great way for you to supplement your own income as well as providing affordable accommodation to lodgers. However, it is important to note that some of your means-tested benefits may be affected should you choose to take part in the scheme.
- Housing Benefit
How the rent a room scheme impacts on your housing benefit will depend on whether the person renting your room is classified as a sub-tenant or a boarder.
If you provide both the room and prepared food as part of the rent, the renter is considered a boarder. In this case, the first £20 of their rent as well as half the remaining amount you receive will be disregarded as actual income.
For example, if you charge £100 a week in rent, £20 of this is disregarded automatically. Then £40 of the remaining £80 rent payment is also ignored when calculating your housing benefit entitlement.
Only £40 of the £100 rental income will then be considered as income, which may affect the amount your receive in housing benefit.
When you provide only a room without meals, the lodger is classed as a sub-tenant of your home. Here, the first £20 of the rent will still be disregarded, but the entire remaining amount is then considered as income.
So, if you were to still charge £100 a week, the first £20 of the cost would be disregarded. The remaining £80 would count as income and could impact on your housing benefit entitlement.
Another benefit of the Rent A Room Scheme is that if you rent out your only spare room, you may no longer be affected by the bedroom tax. However, if you have other spare rooms these would still be included.
- Universal Credit
If you are in receipt of universal credit, any money you get from sub-tenants and lodgers will not be counted as income up to the tax-free allowance of £7,500 per year.
- Council Tax Reductions
Where if you were living alone you may have qualified for the 25% single persons’ discount on your council tax bill, if you choose to rent out a room you will no longer be able to claim this.
- Other benefits
There are other means-tested benefits such as income support and pension credit that may be affected by any income you receive from renting out a room. For further advice on how this may impact on you, speak to the TWP team today.
The Rent A Room Scheme – When would I need to pay tax?
As long as your gross receipts from letting are no more than the Rent A Room limit of £7,500 a year (or £3,750 per person for jointly owned properties), then you won’t need to pay tax on your profits. Your gross receipts will include:
- Any rental income before expenses
- Any additional payment you receive for meals, goods or services
- Any balancing charges
If they are over the limit, however, you still may be able to benefit from the scheme. For gross receipts over £7,500 (£3,750), you’ll be given the option of how you wish to pay your tax under the scheme – meaning you can choose the most cost-efficient method for your situation.
This could be either paying tax on the actual profits you have made (rent less any allowable expenses) or on the gross rent you have received minus the £7,500 (3,750) allowance with no allowable expenses.
The Rent A Room Scheme – Which tax payment method should I choose?
This will all depend on your individual circumstances – namely, how much your expenses amount to. Once you have worked out what your expenses are, you can compare them to the Rent A Room Scheme tax-free threshold.
If your expenses come to more than £7,500 (or £3,750), then it may be wise to pay tax on your actual profits minus these expenses. If your expenses come to less than the tax-free threshold, choosing to deduct the allowance from your gross rent would benefit you more.
The great thing about the Rent A Room Scheme is that you do not have to stick to the same method each year. Should your expenses become higher or lower year to year, you simply change how you calculate your bill by informing HM Revenue & Customs.
We can help
You can read more about the Rent A Room Scheme on the gov.uk website. To find out more about how you could save more money on your tax bill, speak to the TWP team today on 01932 704700.